Is Software Eating the Fed

Preface

I have one prerequisite for you: please read the article from Marc Andreesen, “Why Software is Eating the World”. The basic premise of that article is that industries and companies that fail to see themselves as ‘tech companies’ are being disrupted by companies that have a core competency of software. Its worth a read imo. I would postulate it is one of, if not the, most important macro trend driving our economy today (because of the internet).

So what does this have to do with the Fed?

As we all know, due to Covid and the threat to the US/global economy, the Fed implemented Quantitative Easing (QE), which essentially dropped interest rates to zero. I would argue that it was a rational decision at the time. It felt like, at least to me, that just about everyone (at the time) was freaked out that the global economy was going to crater in a matter of months. And no one had any idea as to how long the pandemic would last, how long public places, like malls and restaurants would be closed, etc.

At the same time, another building trend in business, pre-Covid, was a war for talent. But that war was mainly being waged between the cloud/tech companies. When I mention talent here, I don’t just mean software developers/engineers, but people who know how to envision, and radically change businesses and/or create businesses, by creating “products”, utilizing software. That talent war wasn’t widespread or completely accepted.

With QE in place, now businesses, especially tech businesses, were “unchained” and essentially allowed to go make what seemed to be “crazy” offers for tech talent. You could argue this is what the Fed intended, because they wanted to make it easy for companies to get capital and invest it into their businesses. The Fed was implicitly trying to help companies influence their Return on Capital Employed ratio.

Look at the recent earnings numbers from the big clouds. These are multi-billion dollar enterprises, and they haven’t even reached saturation yet. There are still large (Fortune 100) companies that haven’t fully invested in the cloud yet, and hence not even close to reaching full cloud spend. But some have, like Home Depot, and Walmart, just to name a few. But it is definitely not “all” of them. Look at the speed at which Home Depot rolled out curbside pickup during the pandemic. I was impressed.

Caveat: there is probably a good discussion to be had on the minimum wage debate. That seems to have escalated quickly. But let’s leave that to another day.

What I’m postulating is that the war on talent was in full effect. With zero interest rates, it just boiled over into an all out street brawl and everyone got to see it.

When software is eating the world, the assets become talent. And like always, businesses will be judged on how good you are at deploying capital and improving profitability, by investing in the right assets. When the tech companies could borrow money at very cheap rates, due to QE, they knew that the best return on capital was investing in the best talent. In parallel, it seemed like you heard more “non-tech” companies complaining about “big tech” hiring all their best tech talent. The brain drain out of some companies, for instance oil and gas supermajors, has been astounding. Especially the number of those people that now work in tech.

So why is software eating the Fed?

In 2023 we have the Fed taking an aggressive stance to get inflation under control, by eliminating QE, and raising interest rates. And in some areas, I do agree we are seeing lunacy in terms of inflation, especially in restaurants in certain cities (you know who you are).

But in reality, the Fed is like all these companies that are fighting the macro trend of “software eating the world”. In my experience, most of those companies don’t realize they are being eaten by software. Its death by a thousand cuts for them. And until they fundamentally realize that software is one of their core competencies (and talent is an asset), nothing will stop their pain. From a Machiavellian sense, I guess we could say they know this and are purposefully trying to stop that. But look at real results — its futile. As the Andreesen article states, over 10 years ago, you will either learn and adapt, or you will be eaten.

A tangential hypothesis

Is all this “wage inflation” talk simply because Covid smashed other assumptions under-pinning our economy? For example, the talent war and the salaries, and the crazy real estate prices, used to primarily be constrained to Silicon Valley “area”. Now, companies realize they can get talent anywhere, and they get the potential added bonus of not needing real estate assets. And so much of the talent left Silicon Valley and moved into Colorado, Idaho, Texas, South Dakota, Utah, etc etc etc. In all those places, people complain how everything has gone up in price because the influx of California residents who relocated, bought new homes with cash, for higher prices (but to them it was “cheap”).

These are huge impacts to the economy. Core assumptions about our economy have (probably) fundamentally changed.The net result is still the same: some companies realized the asset is talent, and with interest rates at zero, it was “game on”. It’s worth taking note of which companies had the culture that gave them the ability to see and accept these fundamental changes, instead of fighting it.

Summary

Does Chairman Powell realize this? Yes in the short-term he might get “big tech” to do small layoffs (perhaps not even material in terms of financial pain), and he might get them to remove all the job openings on their websites. And to be fair, it truly sucks for the people who did lose their jobs in this nonsense. But it’s all just temporary. The rationalization and interpretation of Return on Capital Employed is still the fight to win.

Does the Fed realize that by harming companies allocating capital to the right (human) assets, all you are really doing is harming the U.S. economy’s ability to continue to evolve, transform, and reinvent itself, as every good capitalist should be in favor of? Mess that up and you could harm corporate profitability, which gives the American people the money to spend on all the world’s goods. This has been, and continues to be, the most important global developmental driver, since WW2. (There is still this very sticky issue of managing inflation)

I wonder if the Fed realizes what they are up against, and if they really understand what results and behaviors they are trying to reinforce?

Maybe they do. Let’s hope they know that this macro trend is unstoppable, and all they are doing is trying to get inflation under control, while still helping our economy allocate capital to the right assets, and unleash the potential that exists, thru people. Maybe they are not seeing this as either/or, but instead framing it as a polarity.